Credit Suisse Global Investment Returns Yearbook 2020 ...

February 2020

Summary Edition Credit Suisse Global

Investment Returns Yearbook 2020

Elroy Dimson, Paul Marsh, Mike Staunton

Thought leadership from Credit Suisse Research and the world's foremost experts

Coverage of the Summary Edition

This report is a summary version of the full

Credit Suisse Global Investment Returns Yearbook

2020, which is available in hardcopy only and

contains four deep-dive chapters of analysis

leveraging this unique dataset. The first chapter

of the printed Yearbook describes the coverage

of the DMS database, the industrial transformation that has taken place since 1900,

explains why a long-run perspective is important,

and summarizes the long-run returns on stocks,

bonds, bills, inflation and currencies over the

last 120 years. The second chapter of the 260page volume deals with risk and risk premiums,

documenting historical risk premiums around

the world and how they have varied over time.

The third chapter of the hardcopy book ¨C which

is highlighted in this extract ¨C turns to the very

contemporary topic of responsible investing.

The authors present conclusions drawn from

a wealth of academic studies as well as new

work of their own. They study the implications

of exclusionary screening, the limitations of the

ESG ratings that are the toolkit for many ESG

investors, and whether ESG screening genuinely

enhances performance. The authors show that

the route by which ESG investors can combine

the principles of responsibility with aims for

material capital appreciation is to proactively use

their powerful ¡°voice,¡± and to harness the

voices of others to engage deeply with investee

companies. An active rather than passive

approach to ESG drives returns. The fourth

chapter of the full Yearbook focuses on factor

investing: size, value, income, momentum,

volatility and other smart-beta approaches to

asset management.

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The full 2020 Yearbook concludes with an

in-depth historical analysis of the investment

performance of 26 global markets ¨C 23 countries

and three transnational regions.

To highlight the new and impactful research for

the 2020 Yearbook, the opening section of this

Summary Edition starts with an insightful and

broadly based review of ESG investing. The next

section looks at investing for the long term, with

a focus on long-run asset returns, risk and risk

premiums, and factor investing ¨C all based on

evidence that runs from the beginning of 1900

to the start of 2020. The report concludes with a

short review of the investment performance of

the most important markets in the world since

1900, including China, Europe, Japan, Switzerland, the United Kingdom, the United States and

the World.

To access the full Credit Suisse Global Investment

Returns Yearbook or the underlying DMS dataset,

please consult page 44.

04 Preface

07 ESG investing

19 Investing for the long term

31 Individual markets

33 China

34 Europe

35 Japan

36 Switzerland

37 United Kingdom

38 United States

39 World

40 References

43 Authors

44 Imprint

45 General disclaimer/important information

Extracted from:

CREDIT SUISSE GLOBAL INVESTMENT

RETURNS YEARBOOK 2020

Elroy Dimson, Paul Marsh, Mike Staunton

emails: edimson@london.edu,

pmarsh@london.edu, and

mstaunton@london.edu

ISBN for full Yearbook 978-3-9524302-9-3

Cover photo: gettyimages, Bento Fotography

For more information, contact:

Richard Kersley, Head Global Thematic Research,

Credit Suisse Investment Banking,

richard.kersley@credit-, or

Nannette Hechler-Fayd'herbe, Chief Investment Officer,

International Wealth Management, Credit Suisse,

nannette.hechler-fayd'herbe@credit-

Copyright and acknowledgements:

See page 44 for copyright and acknowledgement

instructions, guidance on how to gain access to the

underlying data, and for more extensive contact details.

Summary Edition Credit Suisse Global Investment Returns Yearbook 2020

3

Global Investment Returns Yearbook

As the Global Investment Returns Yearbook

enters 2020, we move beyond a second decade

that has proved highly rewarding for global

investors with annualized real equity returns of

7.6% and a still robust 3.6% for bond investors.

While it might be argued that equities are in

many respects getting back much of what they

lost in the first decade of the millennium, making

returns over the 20-year period look less out

of keeping with the history books, the same cannot be said of bonds where the extended period

of premium real returns is unprecedented.

The backdrop has of course remained one of

exceptionally low nominal and real interest rates

supporting the value of all financial assets both in

developed and emerging markets, a legacy of the

Global Financial Crisis. A number of government

bond markets have nominal long bond yields still

rooted in negative territory, while many corporates

enjoy the related benefit of also borrowing at

negligible cost to retire equity, with central

banks at the same time often happy to buy

the paper they issue. Curious times indeed.

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The value of a study that is shaped by more

than a century of financial history is its ability to

remind us how exceptional conditions such as

these are and the need to check ourselves when

we hear the typically costly phrase uttered ¡°it¡¯s

different this time.¡± An equity risk premium exists

for a reason; namely, the volatility of equity returns.

Credit Suisse¡¯s House View does indeed see a

healthy range of sources of potential volatility in

the year ahead ¨C corporate profit margins peaking,

high levels of corporate debt from the releveraging

we have seen, a polarized political backdrop in a

US election year, and monetary easing that has

all but run its course.

Being paid to take the risk

Beyond the immediate outlook, an ongoing and

lively discussion remains as to what the equity

risk premium should be in the years ahead. It

assumes crucial significance with risk-free rates

that are close to zero. In such circumstances,

the return on equities is simply the payment for

taking risk. The authors continue to stress that

investors should assume a sober view of the likely

excess returns equities can generate from here.

This is not just judged against the standards

of the last decade, but also by comparison with

the annualized 4.3% premium relative to bills

observed across the life of the Yearbook. A more

tempered view is in many respects a natural consequence of the world of low real interest rates in

which we are living. The study has shown that,

when real rates are low, future returns on equities

and bonds tend to be lower rather than higher.

Shifts from one real interest rate environment to

another can see step changes in returns as investors adjust their future expectations. The reset

since the Global Financial Crisis as real rates collapsed has driven superior returns. Should a turn

in the monetary cycle see an upward jump in real

interest rates, the reset in financial assets can be

in the opposite direction. This is still a scenario

to keep in mind. The working premise that the

authors still believe investors should factor into

their long-term thinking and modelling is an annualized equity premium relative to cash of around

3?%. This is a consistent view they have held

throughout this millennium. The prevailing

straight-jacket of low real interest rates provides

no reason to change it.

The ESG revolution

If low real interest rates are influencing the level

of the equity risk premium, ESG investing is reshaping the nature of asset management. Investments with products linked to environment,

social and governance (ESG) issues now exceed

USD 31 trillion. The 2020 Yearbook adds to the

body of thematic ESG work with a comprehensive

and objective examination of the challenges for

investors integrating the considerations of ESG

factors into their investment approach.

Conscious of the tendency of many to advocate

for or against rather than genuinely analyze the

merits of ESG, the authors present conclusions

drawn from a wealth of academic studies as well

as new work of their own. The study specifically

analyzes the implications of exclusionary screening, the most prevalent of ESG approaches; the

role of and, more specifically, limitations of the

respective ESG ratings that invariably form the

toolkit for many ESG investors; and whether

ESG screening genuinely enhances returns.

For those pursuing exclusion-based strategies,

the good news is that, over the longer term, such

strategies need not compromise diversification

and relative risk-adjusted returns. The caveat is

that the shorter term can lead to significant deviation from such longer-term results, both positively

and negatively. This could prove a material issue

for the providers of ESG investment products if

their performance is judged on a shorter-term

time horizon. Quantitative strategies to mitigate

such volatilities may assume a key significance.

For those relying on ESG screening to enhance

returns and reduce risk, there is a vast literature

with sometimes conflicting results depending on

time horizons and approaches taken. However,

long-term evidence dating back more than 20

years finds no conclusive evidence of this. This

is in part due to lack of consistent data and

universal agreement on what defines E, S and G

or perhaps it is a logical reflection of efficient

markets. However, neither does there seem to

be a high price to be paid for ethical principles.

The authors¡¯ work shows that the way ESG

investors can combine principles of responsibility

with aims for material capital appreciation is to

proactively use their powerful ¡°voice.¡± They should

also harness the ¡°voices¡± of others to engage

deeply with companies to drive change rather than

¡°exit¡± through policies of exclusion. An active rather

than passive approach to ESG drives returns.

Factor investing meets ESG investing

If new ESG strategies are progressively dominating

the investment landscape, factor investing and

smart beta strategies also remain very much in

vogue. According to FTSE Russell, 65% of

European asset owners had adopted smart

beta strategies by 2019. The 2020 Yearbook

refreshes its analysis of factor returns around the

world. It is designed to probe more robustly into

the stability of a series of specific factors and their

premia with the benefit of a long history of data.

It is hard to ignore the very weak performance

of value since the Global Financial Crisis and

extending into 2019 with yet another year of

negative factor returns. It arguably stands out as

another consequence of the low interest rate

world which so rewards duration. However, and

with alarming circularity, a moot point is whether

ESG investing and the weight of flows attracted

to it intrinsically carry negative consequences for

value when one considers the sectors most likely

impacted by exclusions.

The 2020 Yearbook is published by the Credit

Suisse Research Institute with the aim of delivering

the insights of world-class experts to complement

the research of our own investment analysts. For

previous editions and other studies published by

the Research Institute, please visit:

researchinstitute.

Richard Kersley

Head Global Thematic Research,

Credit Suisse Investment Banking

Nannette Hechler-Fayd'herbe

Chief Investment Officer,

International Wealth Management, Credit Suisse

Summary Edition Credit Suisse Global Investment Returns Yearbook 2020

5

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